Working Paper

Title: Loglinear approximate solutions to RBC models: An illustration and some observations

Reference Number: 1093

Publication Date: January 2004

JEL Classifcation: E13

Author(s):

Sau-Him Paul LauThe University of Hong Kong

Philip Hoi-Tak NgThe University of Hong Kong

Abstract:Following the analytical approach suggested in Campbell (1994), this paper considers a baseline real-business-cycle (RBC) model with endogenous labor supply. It is observed that the coeffcients in the loglinear equations approximating
the equilibrium are related to the fundamental parameters in a relatively
simple manner. These equations can be utilized to obtain the closed-form
approximate solution with ease and to demonstrate the properties (say, uniqueness) of the solution with clarity. Furthermore, comparative static results can be confirmed analytically (by, for example, straightforward differentiation). We
believe that (at least some of) these conclusions can be generalized to more
complicated RBC models.